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Globalization and Banking

Asli Demirgüç-Kunt's picture

Since the global financial crisis of 2007, international banking has attracted heightened interest from policy makers, researchers, and other financial sector stakeholders. Perhaps no sector of the economy better illustrates the potential benefits—but also the perils—of deeper integration than banking. Before the crisis, international banks (banks that do business outside of the country they are headquartered in) were generally considered to be an important contributor to financial development as well as economic growth. This belief coincided with a significant increase in financial globalization in the decade prior to the crisis, particularly for banking institutions.

What do we know about the link between financial inclusion and inclusive growth?

Asli Demirgüç-Kunt's picture

Adults around the world and in all income groups use a variety of financial services, ranging from digital payments and savings accounts to loans and insurance. Many low-income adults, however, rely largely on informal financial services — 2 billion adults worldwide, or 38 percent, reported not having an account at a formal institution in 2014, according to Global Findex data. The World Bank has launched the ambitious goal of Universal Financial Access by 2020. This goal is not an end in itself. Rather, financial inclusion is a means to an end.

Which bring us to the question: What do we know about the link between financial inclusion and inclusive growth benefiting all income groups?

Not all eggs in the same basket? The role of sectoral specialization in the banking system

Thorsten Beck's picture

Students of systemic banking distress point to concentration in specific asset classes or sectors as one of the most important factors explaining these crises. The last two global crises are good examples: the simultaneous overexposure of several banks to the U.S. mortgage market initiated the global financial crisis `07–`08 and the overexposure of several banks to sovereign debt of distressed European countries severely deepened the European debt crisis of `11–`12. Given the importance of risk concentration in banking it is therefore surprising how little empirical evidence is available on the relationship between sectoral concentration and bank performance and stability. This absence of research is mainly explained with a lack of data. In recent work, we introduce a new methodology to measure sectoral specialization and differentiation and relate these measures to bank performance and stability (Beck, De Jonghe and Mulier, 2017).

Asia’s financial connections with the rest of the world: changing patterns

Ruth Llovet Montanes's picture

As economies in the East Asia and Pacific (EAP) region have developed, they have also become important in international financial transactions, both as a source and destination of cross-border bank lending, foreign direct investments (FDI), and portfolio investments. But, as we document in a new paper (Didier et al., 2017), the composition of those financial connections has been changing in recent years in at least two fronts: (i) the partners with which EAP countries interact and (ii) the type of financial transactions conducted.

Can government subsidies spur science-industry collaboration and innovation?

Miriam Bruhn's picture

Efforts to foster collaboration between science and industry have long been a part of innovation policy in many countries. Firms stand to benefit from accessing the specialized infrastructure and expertise available in universities. Researchers gain access to practical problems that can provide greater relevance for their research, and to industrial capabilities for manufacture and assistance in commercializing their ideas to take them to market. Yet, there are barriers that inhibit collaboration, including financing constraints, information asymmetries, and transaction costs in negotiating collaboration agreements.

Nascent stock exchanges — tales of success and failure

Thorsten Beck's picture

Public equity markets are seen as a critical component of a developed financial system, with such markets going back to the 18th and 19th century in many advanced economies.  There have been therefore intensive efforts of donors and local government to establish such markets across the developing world, in the 1980s across Sub-Saharan Africa and in the 1990s across many transition economies.  These efforts, however, have been met with mixed success, illustrated by the statement by a local market practitioner that “an entire year’s worth of trading in the frontier African stock markets is done before lunch on the New York Stock Exchange.”1 On the other extreme are markets such as China, which have developed rapidly over the past two decades, with many listed companies, high trade volume and a broad investor basis.  What explains why some countries have well-developed public equity markets while others have shallow and illiquid markets?

Banking the unbanked: Measuring the success of JDY

Sumit Agarwal's picture

There is a big debate about the role of financial markets and products in shaping consumer welfare and real economic activity. In developed economies, there is an increasing discussion that financial sector may have become inefficiently large and products offered to households may have become excessively complex. In contrast, in many developing countries, like India, there has been a significant push to increase the usage of financial products — to “complete” the market.

This article is based on an extensive scientific study that evaluates the Pradhan Mantri Jan Dhan Yojna (“JDY”) launched in India on August 28, 2014. Our study has two modest objectives. First, we document the initial uptake and subsequent usage of banking services — that includes a savings account, overdraft facilities, and insurance benefits — by the unbanked targeted by the program. We compare the usage patterns of banking services of households who got access to banking under JDY with similar households who already had access to banking services before the program. Second, we exploit the regional variation in financial access to explore how expanding access to financial services is related to broader outcomes such as GDP growth, lending, consumption expenditure, retail commodity prices and house prices.

Is there a natural resource curse in finance?

Thorsten Beck's picture

The natural resource curse has featured prominently in discussions on why many developing countries fail to grow. This curse takes on many flavours — adverse exchange rate effects, underinvestment in human capital and institutions, political conflict and violence, to name just a few. What about the effect on the financial sector? The financial sector has been shown to have a critical role in intermediating domestic savings into domestic investment and in allocating scarce resources effectively, with positive repercussions for economic growth (Levine, 2005). The financial system should thus serve as an important absorption tool for windfall gains, such as arising from natural resource rents. Does it fulfill this role? Previous work has shown that financial systems are less developed in more resource-rich countries (Beck, 2011), but this could be driven by demand, rather than by a supply-side related curse.

Can foreign banks bridge the information gap to boost exports?

Shawn W. Tan's picture

Foreign banks can play an important role in facilitating international trade. They can provide trade financing, enforce contracts, and reduce information asymmetries. Studies have shown that trade financing is an important channel to boost exports. For example, Claessens and others (2015) show that sectors that are more dependent on external finance have more bilateral exports when a foreign bank from that trade partner is present in the country. Much like immigrant networks and colonial ties (Rauch 1999), foreign banks can play a role in reducing information asymmetries for exporting firms, especially in countries where there are fewer financing constraints. Foreign banks have strong ties with their parent country, and are better placed to assess the profitability of a given product in that market and provide information about export market conditions.

The hidden costs of index investing in foreign markets

Alvaro Enrique Pedraza Morales's picture

Cross-border portfolio investments are increasingly important in global markets. Since 2001, the share of equity holdings by foreign investors grew from 19 percent of the world's stock market capitalization to more than 35 percent by the end of 2015 (IMF, 2016). Much of this recent growth has been in foreign index funds, that is, in funds that replicate the return of an index by buying and holding all (or almost all) index stocks in the official index proportions (Cremers et al., 2016).  Notwithstanding their popularity among investors, little is known about how managers of these funds trade to accommodate flows, and how their performance compares to domestic funds with similar management style.